 everybody. This is Mark Coleman, your co-host today on Talking Tax here on Think Tech Hawaii, your favorite community affairs program. We cover all the world as well apparently. Anyway, my co-host today as usual is Tom Yamachika. He's really the main man here as usual on this show. He's the president of the Tax Foundation of Hawaii and that's why we call it the Talking Tax Show. He's the expert on that subject. He's a private practice but he's also head of the Foundation which keeps track of all the tax goings on at the legislature and the county councils. Today we're going to talk about a tax issue, not a law, not a proposed law or anything like that. We're going to talk about the process of amending your return if so requested by a tax agent and it's the basis of the show today as a column he wrote recently called amended return equals guilty plea and that sounds kind of ominous. So Tom why don't you explain that a little bit? Good morning everybody and morning Mark and thanks for that wonderful introduction. Today instead of talking about what our legislature is doing, we're talking pretty much about the nuts and bolts of what happens in daily life if you are audited and there are a lot of people getting audited out there. We hear about this every once in a while and the point of today's show is to get people understanding you know some of the tactics that auditors use and what the ramifications are for you as a taxpayer. You have rights and we don't want you to lose them unwittingly. Now the technique we're talking about today is called please amend your return and the way that works is you get into a tax audit. You are unfortunately one of the people who are picked for a tax audit you know a certain percentage of people get picked for a tax audit every year and you're with the tax auditor and the tax auditor asks you for documents you give it to give the documents to them just like a regular upsetting citizen and the auditor then says okay I found something I found this portion of income which you haven't reported will you please amend your return to include that item of income okay and for those of us who represent people who are being audited it's kind of an unusual request because typically what happens if an auditor finds something is the auditor can write it up on their side and issue what's called an assessment. First you get a proposed assessment you get 30 days to confer with the department and then if conferring with the department doesn't produce agreement you get what's called a final assessment but here the auditor is offering you a means to short circuit all of that by saying please amend your return and the question then becomes what happens if you do that um and again this is just uh an information show so oh we need you as taxpayers to know what's going on and what's going on is if you amend your return uh the change is coming from you not from them and that means you lose your appeal rights now um when an auditor and you don't agree on a particular issue the auditor has the right to write you up and assess additional tax and if you don't agree uh with that additional tax then you have appeal avenues uh in within the department you can go to the administrative appeals office that's what it's for within um you know quasi within the department there is something called the board of review and and those are three people that are uh on the department's payroll but aren't aren't technically part of it that act as a essentially administrative hearing officers they'll you know they uh can hear your case and render a decision but they are not part of the department's chain of command so they have some independence in that regard and uh the of course the other thing you can do is appeal to uh court there's a special court called the tax appeal court that you can go to and that court hears uh disputes like um not only disputes over interpretation of the tax laws but also if there are say constitutional challenges if the tax isn't constitutional then the court has the power to adjudicate that type of challenge and you appeal from the tax court if you go that far can you go to a regular court at that point uh well the tax court is a regular court oh it is it's considered yeah it's considered it's it's uh basically in the circuit court building and it's like any other circuit court it says it just have a different title but if you had a ruling that you didn't like there you could appeal it even higher you could go up yeah uh you could go to the immediate court of appeals or the supreme court of Hawaii okay like any other court judgment oh she um there there are you know a little uh you know some quirks in the appeal process that uh you need to be aware of if you're gonna do that but but basically it's the same as appealing from a regular circuit court judgment now um all of that of course is going to be denied to you if you amend the return yourself because again that change is considered to come from you and not from the department and uh and there's a law that says you can't appeal uh from your own return well is that is that kind of like a fifth amendment issue i mean is that like testifying against yourself of course a tax return in itself is a fifth amendment issue at the at the core really testifying against yourself but is that kind of what you think about that um well not really i mean uh tax returns are required by law and um you know courts all over the country have considered you know whether taxes are legal and they are so uh well i was i was reading that perhaps uh that at least at the federal level that you do not have a duty to amend your return if if something comes up you don't have to amend it um what would happen then if you didn't amend it well like i said the agent has the right to assess you so if the agent thinks you owe more tax than what you've put on your return uh your agent can rate up an assessment and that's what you're going to feel from so do you think that they are that when you are unlucky first of all do you think how many people do get audited every year and why on average do you know i don't know but i think the national statistics are like around five percent okay and and locally if so if you did get audited and and they now if they're pulling this tactic on you um are they just are they being malicious are they or are they just trying to be efficient you might say trying to minimize time and and money that that an appeal might involve are they just trying to wipe away this right that you have for their own convenience or or are they assuming that you're a bad person and they want to get you get you or what uh i think it's more um it's easier for them if you don't appeal you think that's part of a policy like they have their meetings and they say all right now go ahead and use a tactic as much as you can it'll save us a lot of money in time i i think it is i mean i i've seen lots of auditors from different places use it all it's all over the state uh it's not confined to any one particular place uh it happens all over so um i think it's some kind of established policy somewhere well but i just uh you know that's just my speculation i mean they're really there may in fact be uh you know written documentation for this but um they haven't made that public well has has there ever been any uh court cases challenging this notion this tactic or have you ever thought about challenging that tactic have you ever been in the one it's it's it's very easy to undo you see if you've amended your return and uh and and you think about it for a while and say oh darn this is not what i wanted to do uh as long as you're within the statute of limitations you could amend your return again and that's 30 days no no no it's like three years from oh the uh uh date of your uh you your annual return i see have you ever been in a situation like this yourself with the client well yeah no i mean i've i've um well you're familiar with it probably not yeah yeah yeah so uh i and and my um recommendation to them is amend your return again uh like i said if it's within the statute of limitations you can do that and uh if your amendment is denied you know because your your amendment is like created refund claim because presumably you paid more tax when you filed your amended return so if you amend again to to get it back to your original number there's going to be a refund that's that's being claimed by you and the department can all always say you know claims denied but if they do that you can appeal from that so what would you say so your repeal rates come back well that's great news uh i'm sure everybody'd be happy to hear about that but what would be the basis for an appeal if you were able to if that came to be well it's it of course we're assuming that uh the the issues that the auditor found is not something you agree with so that's why you would appeal uh so like for example you would challenge the assessment well there there would be no assessment if you amend the return there is no assessment but at the so you see you amend the return once there's no assessment you may amend the return again you have a refund claim and then and then um when they deny the refund claim that essentially becomes your assessment well in your article weren't you saying that um they come with you and they say they found some income that you failed to report and so could you please amend your document and that would increase your assessment wouldn't it and and and and i don't know why you would necessarily be talking about a refund help me out here and maybe i'm not getting it okay so so let's say so let's say you file a general excise tax return and uh you report a hundred dollars of income and you pay you're 450 of tax auditor comes up and says hey um you uh got this grant for 50 dollars you didn't report it and the grant's taxable income but you don't you don't think the grant's taxable income but you amend the return and you pay another uh two dollars and 25 cents right with penalties and interest presumably okay um now if you if you then listen to this show and and say well look um i have a case that my grant is not taxable then what you do is you amend your return again to go back to your hundred dollars and then you say okay uh so um my my actual amount due is on uh is four dollars and 50 cents i paid 675 so i want my two dollars and 25 cents back plus the penalties and interest that's your refund claim i see oh uh huh so does this does this tactic apply mostly to GET or or or to personal income tax corporate income tax whatever well it applies to anything i see it mostly used on GET because um uh GET is basically our department of taxation spread and butter it's our state's bread and butter it's also probably where most of the income is sort of a voluntary disclosure right uh GET and at least a lot of deductions and maybe cash payments and things like that well um one thing you got to remember about GET um it doesn't have deductions pretty much oh but oh so oh so that's right yeah yeah so that's why uh it's it's our state's bread and butter all you gotta do is deal with the income and um there are no deductions to prove up so at what point does do they come at you with something like a fraud claim and they're really mad about it oh they can they can do that for example if um you charge your customers g tax put it under bill and you don't pay anything but uh huh uh huh okay wow yeah then then they they consider that you've defrauded your customers um had to get very very mad about that no well what how would they okay so is this a normal court procedure in normal courts um where it is you somehow can how do you look i'm i'm trying to and now analogize this to a regular court where somehow you could end up losing your right to appeal like if you plead guilty which is what you're saying here if you amend your return you're you're basically pleading guilty and yeah and that's that's it's kind of the tax world's equivalent of pleading guilty yeah because if you plead guilty in in regular court um then consequences then come right and and does that mean you can't appeal in a regular court down the road i mean say hey i you know i changed my mind i i don't feel like i was guilty after all you know or whatever well i i think you know there's a means for you to change your plea but um um but i think once you uh you know you're up there in the hot seat and the judge is asking what's your plea what's your plea man and you say guilty uh the judge propels the sentence it's kind of tough to change after that yeah yeah yeah well i guess if you're in prison maybe you'd have time to put together some sort of a of a hey can we reconsider the sentence i suppose right but maybe you're always speak still be guilty well you would you would have to withdraw your guilty plea first and and in the tax world the event the equivalent equivalent of that is amending your return again and and and like i said there um there are limits on it like for example if the statute of limitations has passed uh you can't uh that that's not available to you i see well so that has this ever is this a thing that deserves some legislative attention perhaps well the the the same statute uh that says you can't you can't appeal from your own return it's it's been on the book since the 1930s i believe so it's so we've had it for a hundred years and i don't think uh well let's say it's going to be changing at any time soon well do you think there's abuse of it you think this is an abuse is really the question well uh i think in a way because the the auditors know what amending a tax return means in order in order in order in in in terms of you know leaving appeal rights taxpayers don't have as much information because they've not gone through an audit before at least most in most cases so uh they're at an information disadvantage and uh that's why you know if you are being audited you know you should consider being represented by a professional because um it's much less likely that an auditor would be able to snow a professional yes do you think this is something less professionals uh in Hawaii are familiar with i believe the either they are or they should be it what do you know about how many of all the hawaii taxpayers that there are um do you have any idea of how many are represented by tax accountants tax professionals i i don't know you think these cases are mostly filed against people that don't have tax accountants or the or that this tactic is applied mostly against you know innocent people so to speak people who have no clue um well audits come up against people who have um no representative and people who do uh not everybody has a professional prepare their return uh for the ones who do have a professional prepare their return then uh it's very it's a very natural thing for the taxpayer to call in that professional um but for the one who uh hasn't had a uh a professional from the beginning uh there's you know the the new step that they got to go through namely you know looking through different professionals finding someone who uh meets their needs and then you know going forward with that what do you think about i know you're a tax accountant yourself or a tax attorney maybe maybe you would have a biased opinion on this but what do you think about people filing their own taxes without without representation so to speak that go between someone who can apprise them of all the of all the you know the latest updates in in the irs and state for tax law and uh who you know would be aware of tactics that might trip you up or and that of course would also be there to represent you if there's any problems how do you think that compares with you know turbo tax and all these other programs are what people seem to think is really just fine maybe it's a matter of how complicated your taxes are but is there a point at which you really ought to have a tax accountant in your opinion well you know i i think i think you hit it on the head there depends on how how complicated your return situation is uh the the more complicated it is the more uh you would need i think a professional um to make sure that uh that nothing is going wrong but you know professionals do have a cost right so you have to engage a cost benefit analysis to um right you know just to see if it's worth it for you right yeah i guess most people that i know that rave about the tax programs that you can buy the software usually are saying yeah but my taxes are so simple you know and um well let me and and and you gotta realize that you know for GET it's not something for which their software in the market oh yeah the the turbo taxes and so where there's all income tax uh huh that's right so it's a good help for income tax but for uh for GET um people are normally on their own i mean this this also applies to um a professional representation of you know large businesses um when i was at pwc uh right one of those yeah and representing businesses of all kinds most businesses only used accountants to prepare their income tax returns for for sales tax compliance um and not only in hawaii but in other states that the business would usually you know do their own thing or or they would um or if they were really big with with presence in like you know 30 40 states they would they would go to a multi-state software company like vertex um and and get helped that way but but if you're in like one or two states um most businesses just do it themselves that's been my experience so so in this in these cases where the irs or the excuse me the state got guy might call you and say i've noticed that you should be i'm suggesting that your menu return i found some things that you ought to take a look at now that's because he's looking at your tax return that you already submitted and and he's he's challenging something that's already there he's not saying i found some additional income that you didn't report it could be could be one of the one or both yeah and how would he know about additional income that you didn't report well a lot um one one key thing that they do is they compare different types of tax returns that you submit every state does that okay so you submit an income tax return you submit your g e t return if the bases are different okay uh then they're gonna they're gonna ask you how come yeah oh well based on your own return or based on an average of other people who do a similar thing no base based on your own returns do you file an income tax return you file a g e t return they say look in in uh online 17 of the income tax return you admitted to having a hundred thousand dollars of income in hawaii but you but you really reported 80 thousand you know where's the 20 man uh huh uh huh okay so then the other way is that they challenge something that you might have listed but you didn't consider it taxable yeah that's that's quite possible too are there any other other other ways people can be tripped up that way um i think probably thousands right probably thousands yeah well this is a a favored tactic apparently or at least a tactic that do t people apparently use but is this something that do you think they do at the federal level you know whether they do this at the federal level i don't know what they do is at the federal level do you focus mostly just on state taxes or when you're you would you do that's your yes that's my thing state of state of hawaii taxes right right how much does your private practice inform your thinking about what goes on at the legislature well um you know i i do both so i mean like like anybody else in hawaii i got two jobs so uh you know you need you need more more than one job to feed your family usually so yeah yeah yeah we live in hawaii second highest tax burden in the country and highest cost of living uh uh number one so it's a a lot of fun to live here in hawaii if you can do it um tom thank you very much for explaining all of this in great detail um you know that the tax system is something we all dread dealing with uh every year you you're involved with it all year uh i i have a tax accountant and i'm always super impressed uh at how anybody keep up with all of that all the changes every year at the legislature and so on but anyway their job much pardon me it's their job yeah well yeah okay and right and they have an act for it and so hopefully they hits their passion but thank you very much tom any last words yeah um today was just an educational experience and be better and more indicated taxpayers right on good deal tom thank you so much and thank you all for watching today hope you enjoyed the show hope you learned something hope you uh stay out of trouble take care and we'll see you next time i love you